Published on 03 Mar 2021.
RAM Ratings has released its latest annual Corporate Default and Rating Transition Study. The publication provides an update on the credit performance of RAM’s rated portfolio in 2020.
Malaysia ended 2020 with one of its worst recessions. GDP growth contracted 5.6% - the steepest drop since 1998, no thanks to the rapid global spread and severity of the COVID-19 pandemic. To contain the outbreak, Malaysia had implemented various stages of lockdowns and mobility restrictions that subsequently exacted a toll on the economy. Demand for non-essential services and goods plummeted, resulting in substantial job losses and financial strain for many businesses.
As at end-January 2021, the Government had launched up to RM320 bil of fiscal stimulus packages and various financial relief measures to help households and businesses contend with the economic fallout. These, including higher allocations for big-ticket infrastructure projects, have shored up the financial markets, as have record low interest rates. The domestic corporate bond market therefore kept up its momentum in 2020, with RM104.6 bil of gross bond/sukuk issuance - at par with the preceding year’s RM105.3 bil. The bond/sukuk pipeline spiked up in 4Q 2020 as companies took the opportunity to refinance or lock in cheap funding.
Unsurprisingly, the overarching theme of rating actions was negative last year as the various lockdowns started to strain some issuers’ finances. In total (counting downgrades and outlook revisions), RAM took negative rating actions on 17 issuers (9.5% of our rated portfolio) in 2020. Of these, the ratings of six issuers were downgraded (2019: three) as opposed to four upgrades (2.2% of rated portfolio). At the same time, the number of issuers on negative outlook climbed up to 7.8% (2019: 0.6%). Issuers affected by negative rating actions included those from the tourism/hospitality and travel/aviation sectors, which have been hard hit by movement restrictions. Following these negative actions, the rating drift (defined as upgrades net of downgrades and defaults) ended 2020 in negative territory. There were, however, no defaults during the year.
We expect the negative bias in rating actions to remain through the next few quarters, as 14 RAM-rated entities still carried a negative outlook as at end-December 2020. That said, we expect the overall rated credits to withstand near-term pressure because over 80% of our portfolio is anchored by financial institutions and project finance companies with strong capitalisation, robust liquidity buffers and healthy cashflows. In view of MCO 2.0, RAM is currently undertaking another portfolio-wide assessment which will be released soon. The preliminary results indicate limited near-term rating pressure on our portfolio.
Our broader analysis of corporates in ASEAN-6 (ASEAN-5 + Vietnam) reveals that Malaysian firms have stronger debt protection metrics than their ASEAN peers. Although half of the companies listed on Bursa Malaysia still reported weaker earnings in 3Q 2020 (-0.8% y-o-y compared to -33% in 2Q 2020), their debt protection metrics remained intact. For the third quarter of last year, the median gearing ratio averaged 0.22 times (ASEAN: 0.38 times) while debt servicing capacity - measured by the pre-tax earnings-to-debt ratio - averaged 0.34 times (ASEAN-6: 0.23 times). The average Malaysian firm had enough cash to support 3.5 months’ operating expenses. Relative to RAM’s benchmarks and ASEAN peers, these metrics are not considered aggressive. Moreover, recent sample data for 4Q 2020 results indicate improvements in these measures for both Malaysia and ASEAN-6.
The path to full recovery will remain uneven and fragile in 2021, depending much on the success of the country’s vaccination programme and the global outlook. Swift execution of the inoculation regime and no further outbreaks may lend upside to Malaysia’s economic recovery and RAM’s GDP growth forecast, which currently stands at 5% for this year.
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Han Ting Ting
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About RAM Rating Services Berhad (RAM Ratings)
Established in 1990, RAM Ratings is a leading credit rating agency registered under the Securities Commission’s Guidelines on Registration of Credit Rating Agencies, 2011. In addition to the provision of credit ratings for corporate bonds and sukuk and their issuers, RAM Ratings also provides research and publications on Islamic finance, fixed income and macro-economic and industry analysis as well as data analytics relating to credit risk, counterparty assessments and other related domains.
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